Expect a Pullback This Week

Last Thursday, I noted that the S&P 500 has barely budged over the past few trading days. Well, we can add Friday’s market to the list as well. The S&P 500 lost 0.52 points on Friday or -0.04%.

This week, however, I think it’s very likely that we’ll see a sell-off following the Fed’s QE2 announcement. Don’t worry: I don’t think it will be a major sell-off. Bear in mind that with the recent rally that began on Aug. 30, the market has rallied on 27 sessions and fallen on just 16. The largest pullback based on closing numbers is -1.6%.

The catalyst for any sell-off will most likely be that the Fed’s QE2 total won’t be as much as Wall Street expects. The number that’s most frequently tossed around is $500 billion in Treasury purchases over the next six months. That’s been estimated to be equivalent to a -0.50% rate cut.

I’m still expecting a number closer to $250 billion, but no one from the Fed has contacted me for my views. In any event, we’ll know more on Wednesday. Also, the ECB and Bank of England meet on Thursday, so it’s a big week for central bankers.

The good news that no one wants to hear is that this has been an excellent earnings season. It’s odd how there’s always someone to attack any good news that comes along. According to the last figures, 71% of companies have beaten earnings expectations so far. That’s very, very high.

I will add with false modesty that all the stocks on our Buy List have beaten earnings this season. We’re not done just yet. There are three more earnings report for the Buy List this week; Moog (NYSE: MOG.A[1]), Wright Express (NYSE: WXS[2]) and Becton Dickinson (NYSE: BDX[3]).

We’re also heading into what has historically been the best six-month stretch of the year for the market. Bespoke notes that since 1960, the S&P 500 has averaged a +6.4% gain[4] for the November through April period. For May through October, the market has only averaged 0.8%. I should add that the market has also done well for the last three “third years” of a presidential term.

I’ll be very curious what the ISM Index will say for October. I don’t expect much of a change, but even a little movement should put the Double Dip nonsense to rest. It won’t, of course, but it should.

Finally, we’ll get the October jobs report on Friday and it will not be pretty[5].